EPAct 179D Experts

"The least expensive kilowatt, is the one not used."

- Jacob Goldman

The EPAct Tax Aspects of the U.S. Military Supply Chain

Introduction

Beginning in January of 2013, $55 billion in military budget cuts are set to
take place. These cuts in military spending are only a fraction of the $487
billion in projected defense spending reductions set to place over the next ten
years1. Of the major defense contractors, almost all but one get
over fifty percent of their sales from the U.S. government, Northrop Grumman
being the largest at ninety percent 2. Defense contractors must
adapt to these deficit-reducing measures. These corporations should examine
energy-efficiency projects and tax incentives to cut costs and help remain
viable in this volatile market.

The EPAct Section 179D Tax Opportunities

Pursuant to Energy Policy Act (EPAct) Section 179D, commercial property
owners making qualifying energy-reducing investments in their new or existing
locations can obtain immediate tax deductions of up to $1.80 per square foot.
If the building project doesn't qualify for the maximum EPAct Section 179D
$1.80 per square foot immediate tax deduction, there are tax deductions of up
to $0.60 per square foot for each of the three major building subsystems:
lighting, HVAC (heating, ventilating, and air conditioning), and the building
envelope. The building envelope is every item on the building’s exterior
perimeter that touches the outside world including roof, walls, insulation,
doors, windows and foundation.

Facilities Retrofits

In manufacturing and warehouse facilities, lighting is the largest energy
consumer. Defense contractors should first focus on retrofitting
federally-banned certain metal halide and all T12 lighting fixtures in their
facilities and then focus on their most inefficient facilities. With today's
energy efficient lighting, retrofits in warehouse and manufacturing facilities
often qualify for $1.80 per square foot EPAct deductions. Lighting retrofits in
these types of facilities are very economically feasible and after considering
all rebates and incentives often have paybacks of about two years. The below
chart demonstrates the total potential EPAct incentives for four major defense
contractors:

Company Name

Facilities Square Footage

Total Potential EPAct Deduction

Boeing

84,776,000

$152,596,800

General Dynamics

52,800,000

$95,040,000

Northrop Grumman

37,397,000

$67,314,600

Raytheon

29,430,973

$52,975,751

Military Embraces EPAct

At the top of the defense supply chain is the military themselves, and they
have already embraced energy efficiency as a major policy goal. Primary
designer's of the military's energy efficient projects can claim the EPAct
deductions under the primary designer laws. In this case the military benefits
from the perpetual energy savings and designers have an incentive to design
these energy efficient projects.

The U.S. Army and Navy have both greatly benefitted this program and have
both developed military protocols to process these deductions in a fair and
efficient manner3,4. In the Army's case, they currently have an
energy efficiency task force and these energy efficient retrofits will help
them achieve their energy reduction goals 5.

Augmenting The Defense Supply Chain

Once defense contractors analyze and retrofit their own facilities they
should focus supply chain initiatives to incentivize their suppliers to follow
suit. Walmart has enacted an energy efficiency program for their
suppliers6. By sending their employees to audit their suppliers
facilities they were able to cut their supplier's and their own costs. With the
impending defense spending cuts, the defense contractors should aim to be as
efficient as possible in their operations, and that includes utilizing energy
efficient suppliers.

LEED EPAct Opportunities

LEED, or Leadership in Energy and Environment Design, is a building standard
developed by the U.S. Green Building Council (USGBC) . Buildings built to this
standard are by definition efficient and often qualify for $1.20-$.180 in EPAct
deductions. Many defense contractors have LEED buildings in their portfolio.
They should certainly evaluate their portfolio and make an effort to capture
EPAct on their existing and future facilities .

Change of Accounting

Since the enactment of EPAct in 2006, defense contractors have most likely
completed qualifying retrofits and new constructions. The IRS allows for
corporations to submit a 3115-change in accounting to go back and claim
previously missed deductions. Defense contractors should evaluate previous
completed retrofits; these projects will be a source of "easy money" for the
industry and will require minimal work to capture.

Conclusion

Defense contractors should follow the military's lead and work on reducing
their facilities energy costs and operations. Energy efficiency projects
typically have good economic paybacks A leaner military budget will mean lower
revenue for defense contractors so these corporations should consider all
opportunities to reduce operating costs.